AAON, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Interim financial statements are unaudited. AAON engineers, manufactures and sells commercial heating and air-conditioning equipment.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $102.3 million | $90.3 million | $187.7 million | $167.0 million |
| Gross profit / margin | $32.7 million / 32.0% | $27.1 million / 30.0% | $58.5 million / 31.1% | $48.9 million / 29.3% |
| Operating income | $22.2 million | $17.9 million | $39.0 million | $31.4 million |
| Net income | $14.3 million | $11.1 million | $25.1 million | $19.5 million |
| Diluted EPS | $0.27 | $0.20 | $0.47 | $0.36 |
- Sales rose 13.3% in Q2 and 12.4% for the first half. Unit sales increased 18.3% and 15.1%, respectively; management attributed sales growth primarily to higher volume.
- Operating margin was approximately 21.7% in Q2 and 20.8% for the first half, compared with 19.9% and 18.8% in the prior-year periods. Net margin was approximately 14.0% and 13.4%, versus 12.3% and 11.7%.
- Six-month operating cash flow was $28.5 million, compared with $12.0 million a year earlier. Capital expenditures were $15.8 million; investing cash outflow was $18.9 million, and financing cash outflow was $5.3 million. Cash and equivalents increased $4.3 million to $12.2 million.
- At June 30, cash, certificates of deposit and current held-to-maturity investments totaled approximately $44.3 million. Working capital was $91.5 million. The company had no revolving-credit borrowings and $29.2 million available under its facility, subject to its terms.
- Total assets were $257.5 million and stockholders’ equity was $195.0 million. No debt was outstanding under the revolving facility; the filing reports no interest paid during the first half.
- Cash dividends declared were $0.11 per common share in each period shown. The company repurchased 301,505 shares for approximately $7.7 million during the first half.
Changes versus prior comparable periods
- Q2 and first-half sales, gross profit, operating income and net income all increased year over year. Gross margin improved by 2.0 percentage points in Q2 and 1.8 points for the first half, reflecting lower cost of sales as a percentage of revenue.
- Management cited higher unit volume and lower commodity prices as contributors. First-half average prices were lower year over year for copper (9.3%), galvanized steel (15.6%), stainless steel (20.4%) and aluminum (2.9%).
- First-half SG&A increased to $19.5 million from $17.5 million, mainly due to compensation and profit-sharing costs; lower warranty expense and other expense partly offset the increase.
- Cash from operations increased, but accounts receivable rose by $8.4 million and inventory used $1.9 million of cash. Capital expenditures increased from $9.3 million to $15.8 million.
Outlook, risks and notable items
- Management estimated a 2016 effective tax rate of approximately 36.0%. It estimated 2016 capital expenditures at approximately $32.7 million, including investment in a new research and development lab and water-source heat-pump line. No specific revenue or earnings guidance was provided.
- Management said available cash, projected operating cash flows, committed credit and expected capital-market access should meet working-capital, capital-expenditure and other liquidity needs in 2016 and the foreseeable future.
- The revolving credit facility was amended effective July 27, 2016, extending maturity to July 27, 2018, removing the minimum-working-capital covenant and raising the minimum tangible-net-worth covenant from $95 million to $125 million.
- Key risks include economic weakness and cyclical commercial and industrial construction demand, raw-material and component price volatility, interest-rate changes and competition. Management described construction markets through Q2 2016 as unpredictable and uneven, and said it continued to emphasize the replacement market.
- The board authorized up to $25 million of open-market repurchases; the agreement allowed repurchases through April 15, 2017, subject to its terms. After quarter-end, the company repurchased approximately 300,000 additional shares for $1.8 million.
- The company intended to early-adopt ASU 2016-09 on July 1, 2016. Management said the impact could be material and was not predictable; it expected an approximately $150,000 retained-earnings adjustment for the forfeiture-accounting change.
- Management reported that pending ordinary-course claims and litigation were unlikely to have a material adverse effect. No material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective, with no material change in internal control reported.
Investor facts to verify
- Whether sales volume and margin gains persist, particularly given seasonal demand and uneven new-construction markets.
- Actual 2016 capital spending versus the approximately $32.7 million estimate, and the timing and returns from the lab and production-line investments.
- Cash conversion, including receivables growth, inventory requirements and operating cash flow relative to net income.
- Commodity and component cost trends, and any effects on cost of sales and gross margins.
- Credit-facility terms and covenant headroom after the July 2016 amendment, along with future use of repurchases and dividends.
- The realized tax rate and financial-statement effects of adopting ASU 2016-09.